PREs, VSPs and the ECB: a response to Paul Krugman

In a response to one of our recent posts on Peter Praet’s speech, Paul Krugman argued that there was indeed a fight inside the ECB between the PRE (pretty reasonable economists) and the VSP (very serious people).  We disagree.

Our understanding of what is going on at the ECB is different and somewhat more troubling. We think these categories are not relevant because there isn’t an actual debate between PREs and VSPs but rather a common defensive stance in support of a defunct monetary policy doctrine.

This is probably a stretch but what is clear is that there isn’t at the ECB a culture of economic debate, of disagreements and dissent as much as there is at the Federal Reserve. This is problematic because by pretending to be consensual, governing council members are impeding an intellectual process that is very necessary in difficult times. As a result, this is creating a profound intellectual drag that undermines new thinking about the crisis, about monetary policy and about the monetary union precisely at a moment where disagreements are part and parcel of a necessary process to come to grips with the situation at hands.

Instead, the ECB prefers to paint itself into an academic and policy corner by referring constantly to a fragile doctrine. If anything the discussion about publishing the minutes of the governing council meetings (which was meant to be closed by the end of the year and on which a decision has been postponed) is likely to exacerbate this state of affairs even more by pushing Governing Council members to be more cautious about their communication even inside the secrecy of the Governing Council rather than embrace their respective viewpoints and differences.

The more recent example of this fact is the last speech by Benoit Coeuré (arguably one of the most progressive and intellectually savvy member of the Executive Board) who still managed to pronounce one of the most conservative and incongruous speeches in recent memory.

There are at least three reasons for such a speech:

  • The first one is office politics. Peter Praet, the Head of Research at the ECB, is most probably going to be appointed Vice Chair of the Supervisory Board (despite Vitor Constancio and Yves Mersch fighting for the job), which means that the job of Head of Research of ECB is up for grabs. This is an important job because the Head of Research makes the interest rate proposal to be discussed and approved by the Governing Council. Coeuré is arguably the most qualified of all board members to land the job. He was the chief economist of the French Treasury and has a strong academic pedigree (by ECB standards). Since Coeuré would have to run DG economics, also known as the guardians of the temple, he certainly felt compelled to pay his respect to the ordoliberal throne.
  • The second is European politics. Given the rise in Germans’ concerns about inflation risks, ECB board members need to appear hawkish to assuage German anxieties in order to remain credible and audible in the biggest economy of the monetary union. This pandering to German misconceptions forces the board to “talk the talk”. But “events my dear boy, events” and the economic situation don’t allow the ECB to “walk the walk” which creates very serious communication hazards.
  • The last one is intellectual short sightedness. The sad fact is that the ECB refuses to engage seriously in the debate over modern monetary policy that is raging across academia and the central banking community globally. This is even more regrettable coming from Coeuré who, by virtue of being in charge of market operations, should be more equipped than anybody else on the board to think about modern monetary policy.

The gist of the latest speech by Benoit Coeuré betrays a concerning reluctance to think openly and critically about the conduct of monetary policy and the institutional set-up of the monetary union

On the monetary policy framework, the Panglossian view is basically that: 

We know what has worked in the euro area: an allocation of tasks based on the primacy of price stability. And we know what has not worked: a lack of stability orientation in other policy areas. We have been successful in delivering price stability because we have a clear alignment of objectives and instruments – what is called by economists the “Tinbergen principle”.

First, even by this restrictive metric, this is incorrect since the ECB is forecasting inflation to remain below its own definition of price stability trough to 2015.

Second, it betrays a real neglect for the flaws in the conduct of monetary policy in the first decade of the euro, which have produced price stability but also credit and asset bubbles and contributed to the crisis we know. This is worrying because it partly explains why so little progress has been made on the design of a clear and effective macro prudential policy framework.

On the institutional set-up of the monetary union.

First, Coeuré basically undermines more than a year of intense work for creating a full fledged banking union with a strong fiscal backstop precisely at the time when European governments are negotiating one such backstop arrangement in the context of the Single Resolution Mechanism.

And let me be clear: [the ongoing process of building a banking union] will not be achieved by mutualising risks. On the contrary, banking union reduces risks for taxpayers.

Second, and contrary to what the ECB (from Trichet to Draghi) has been arguing for a long time, Coeuré tries to make the case that the monetary union can be rebuilt without further steps in the way of greater European integration thereby defending a form of institutional status quo:

This does not require a quantum leap in integration. I do not see a strong case today for further fiscal centralisation (…) adjustment can and should take place via flexible markets.


The culture of dissent that is so present at the Federal Reserve and which Paul Krugman often refers to as the conflict with the VSP and the PRE doesn’t really apply at the ECB. In this sense, there is no Manichean fight between the doves and the hawks but rather a generalized intellectual paralysis about monetary policy at the zero lower bound. This lack of internal intellectual debates and even arguments about monetary policy doctrines, instruments, and transmission channels is probably the biggest danger for the ECB and for the euro area as a whole.